Process Costing Flow and Equivalent Units Calculation

PowerPoint Lecture Presentation: Prof. OSLER T.
AQUINO, CPA, MBA

School of Accountancy and Business
Asia Pacific College
Systems Design:
Process Costing
4-2
PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA
Similarities Between Job-Order and Process
Costing
Both systems assign material, labor and
overhead costs to products and they provide a
mechanism for computing unit product cost.
Both systems use the same manufacturing
accounts, including Manufacturing Overhead,
Raw Materials, Work in Process, and Finished
Goods.
The flow of costs through the manufacturing
accounts is basically the same in both systems.
4-3
Differences Between Job-Order and Process
Costing
Process costing is used when a single product is
produced on a continuing basis or for a long
period of time. Job-order costing is used when
many different jobs are worked on each period.
Process costing systems accumulate costs by
department. Job-order costing systems
accumulated costs by individual jobs.
Process costing systems compute unit costs by
department. Job-order costing systems compute
unit costs by job on the job cost sheet.
4-4
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check
4-5
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check
4-6
Processing Departments
Any unit in an organization where materials, labor
or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be
homogeneous.
4-7
Record the flow of
materials, labor, and
overhead through a
process cost system.
4-8
Comparing Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Work in
Process
Direct
Materials
Direct Labor
Manufacturing
Overhead
4-9
Comparing Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Jobs
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
4-10
Comparing Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Processing
Department
Costs are traced and
applied to departments
in a process cost
system.
Direct
Materials
4-11
T-Account and Journal Entry Views of Cost Flows
For purposes of this example,
assume there are two
processing departments
Departments A and B.
We will use T-accounts and
journal entries.
4-12
Raw Materials
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
Direct
Materials
Direct
Materials
Direct
Materials
4-13
Process Cost Flows
(in journal entry form)
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
4-14
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
Wages Payable
Direct
Materials
Direct
Materials
Direct
Labor
Direct
Labor Direct
Labor
4-15
Process Costing
Date Description
Post.
Ref. Debit Credit
Salaries and Wages Payable XXXXX
To record direct labor costs.
4-16
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
Manufacturing
Overhead
Overhead
Applied to
Work in
Process
Applied
Overhead
Applied
Overhead
Direct
Labor
Direct
Materials
Direct
Labor
Direct
Materials
Actual
Overhead
4-17
Process Costing
(In journal entry form)
Date Description
Post.
Ref. Debit Credit
Manufacturing Overhead XXXXX
To apply overhead to departments.
4-18
Process Cost Flows
(in T-account form)
Work in Process
Department B
Work in Process
Department A
Direct
Materials
Direct
Labor
Applied
Overhead
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
to Dept. B
Transferred
from Dept. A
4-19
Process Costing
Date Description
Post.
Ref. Debit Credit
To record the transfer of goods from
Department A to Department B.
4-20
Finished Goods
Process Cost Flows
(in T-account form)
Work in Process
Department B
Cost of
Goods
Manufactured
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Cost of
Goods
Manufactured
4-21
Process Costing
Date Description
Post.
Ref. Debit Credit
Finished Goods XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
4-22
Finished Goods
Cost of Goods Sold
Process Cost Flows
Work in Process
Department B
Cost of
Goods
Manufactured
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Cost of
Goods
Sold
Cost of
Goods
Sold
Cost of
Goods
Manufactured
4-23
Process Costing
Date Description
Post.
Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.
4-24
Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
completion of those units.

We need to calculate equivalent units because a
department usually has some partially completed units
in its beginning and ending inventory.
4-25
Equivalent Units The Basic Idea
Two half completed products are
equivalent to one completed product.
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
+
=
1
4-26
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check
4-27
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units 0.30)
= 11,500 equivalent units
Quick Check
4-28
Calculating Equivalent Units
Equivalent units can be calculated two
ways:
The First-In, First-Out Method FIFO is
covered in the appendix to this chapter.
The Weighted-Average Method This
method will be covered in the main portion of the
chapter.
4-29
Compute the equivalent
units of production using
the weighted-average
method.
4-30
Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
Makes no distinction between work done in prior
or current periods.
Blends together units and costs from prior and
current periods.
Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending work in process inventory.
4-31
Treatment of Direct Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Materials
Type of Product Cost
D
o
l
l
a
r

A
m
o
u
n
t

Direct
Labor
Conversion
4-32
Treatment of Direct Labor
Type of Product Cost
D
o
l
l
a
r

A
m
o
u
n
t
Conversion
Direct labor and manufacturing overhead may be
combined into one product cost called conversion.
Direct
Materials
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
4-33
Weighted-Average Example
Double Diamond Skis reported the following activity in
Shaping and Milling Department for the month of May:

Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%
Units started into production in May 5,000
Units completed during May and 4,800 100% 100%
transferred to the next department
Ending working process 400 40% 25%
4-34
The first step in calculating the equivalent units is
to identify the units completed and transferred
out of the Department in May (4,800 units)
Materials Conversion
Units completed and transferred
to the next department 4,800 4,800
4-35
The second step is to identify the equivalent units of
production in ending work in process with respect to
materials for the month (160 units) and add this to the
4,800 units from step one.
Work in process, June 30:
400 units 40% 160
Equivalent units of Production in
during the month of May 4,960
4-36
The third step is to identify the equivalent units of
production in ending work in process with respect to
conversion for the month (100 units) and add this to the
4,800 units from step one.
400 units 40% 160
400 units 25% 100
during the month of May 4,960 4,900
4-37
Equivalent units of production always equals:
+ Equivalent units remaining in work in process
400 units 40% 160
400 units 25% 100
during the month of May 4,960 4,900
4-38
Beginning
Work in Process
200 Units
55% Complete
Ending
Work in Process
400 Units
40% Complete
5,000 Units Started
4,800 Units Started
and Completed
Materials
4,800 Units Completed
160 Equivalent Units
400 40%
4,960 Equivalent units
of production
4-39
5,000 Units Started
4,800 Units Started
and Completed
400 25%
of production
Beginning
Work in Process
200 Units
30% Complete
Ending
Work in Process
400 Units
25% Complete
Conversion
4-40
Compute the cost per
equivalent unit using the
weighted-average method.
4-41
Beginning work in process: 200 units

Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575

Production started during May 5,000 units
Production completed during May 4,800 units

Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900

Ending work in process 400 units
Materials: 40% complete
Conversion: 25% complete
Compute and Apply Costs
4-42
The formula for computing the cost per
equivalent unit is :
Cost per
equivalent
unit
=
Cost of beginning
work in process
inventory
Cost added during
the period
Equivalent units of production
+
4-43
Here is a schedule with the cost and equivalent
unit information.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175 $ 9,600 $ 5,575 $
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675 $ 378,200 $ 356,475 $
Equivalent units 4,960 4,900
Cost per equivalent unit
4-44
Total
Cost to be accounted for:
Work in process, May 1 15,175 $ 9,600 $ 5,575 $
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675 $ 378,200 $ 356,475 $
Cost per equivalent unit 76.25 $ 72.75 $
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
$356,475 4,900 units = $72.75
$378,200 4,960 units = $76.25
Here is a schedule with the cost and equivalent
unit information.
4-45
Assign costs to units using
the weighted-average
method.
4-46
Applying Costs
Materials Conversion Total
Ending work in process inventory:
Equivalent units of production 160 100
Cost of ending work in process inventory 12,200 $ 7,275 $ 19,475 $
Units completed and transferred out:
Units transferred to the next department 4,800 4,800
Cost of units transferred out 366,000 $ 349,200 $ 715,200 $
Shaping and Milling Department
Cost of Ending Work in Porcess Inventory and the Units Transferred Out
4-47
Applying Costs
4-48
Applying Costs
4-49
Computing the Cost of Units Transferred Out
4-50
4-51
4-52
Reconciling Costs
Costs to be accounted for:
Cost of beginning work in process inventory 15,175 $
Costs added to production during the period 719,500
Total cost to be accounted for 734,675 $
Cost accounted for as follows:
Cost of ending work in process inventory 19,475 $
Cost of units transferred out 715,200
Total cost accounted for 734,675 $
Cost Reconciliation
4-53
Reconciling Costs
Cost Reconciliation
4-54
Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches
Operation costing is
commonly used when
batches of many
different products pass
through the same
processing department.
FIFO Method
4-56
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more
accurate that the weighted-average method)
differs from the weighted-average method in
two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated in the cost
reconciliation report.
4-57
Compute the equivalent
units of production using
the FIFO method.
4-58
Equivalent Units FIFO Method
Lets revisit the Double Diamond Skis example.
Assume the following activity is reported in
Shaping and Milling Department for May:

Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%
Units started into production in May 5,000
Units completed during May and 4,800 100% 100%
transferred to the next department
Ending working process 400 40% 25%
4-59
Step 1: Determine equivalent units needed to complete
beginning inventory.
To complete beginning work in process:
Materials: 200 units (100% - 55%) 90
Conversion: 200 units (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units 40% complete 160
Conversion: 400 units 25% complete 100
Equivalent units of production 4,850 4,840
4-60
Step 2: Determine units started and completed during
the period.
Materials: 200 units (100% - 55%) 90
4-61
Step 3: Add the equivalent units in ending working in
process inventory.
Materials: 200 units (100% - 55%) 90
4-62
Beginning
Work in Process
200 Units
55% Complete
Ending
Work in Process
400 Units
40% Complete
5,000 Units Started
4,600 Units Started
and Completed
FIFO Example
Materials
400 40%
of production
90 Equivalent Units
200 45%
4-63
Beginning
Work in Process
200 Units
30% Complete
Ending
Work in Process
400 Units
25% Complete
5,000 Units Started
4,600 Units Started
and Completed
FIFO Example
Conversion
400 25%
of production
200 70%
4-64
Equivalent Units: Weighted Average vs. FIFO
Equivalent units - weighted average method 4,960 4,900
Less equivalent units in beginning inventory:
200 units 55% 110
200 units 30% 60
Equivalent units - FIFO method 4,850 4,840

As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weighted-
average method to obtain the equivalent units of production under
the FIFO method.
4-65
Compute the cost per
equivalent unit using the
FIFO method.
4-66
Cost per Equivalent Unit - FIFO
Lets revisit the Double Diamond Skis Shaping and Milling
Department for the Month of May to prepare our production report.
Beginning work in process: 200 units
Materials: 55% complete $ 9,600
Conversion: 30% complete 5,575
$15, 175

Production started during May 5,000 units
Production completed during May 4,800 units

Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900
Ending work in process: 400 units
Materials: 40% complete
Conversion: 25% complete
4-67
The formula for computing the cost per
equivalent unit under FIFO method is :
Cost per
equivalent
unit
=
Cost added during the period
Equivalent units of production
4-68
Total
Costs added in the Shaping
and Milling Department 719,500 $ 368,600 $ 350,900 $
Total cost per equivalent unit = $76.00 + $72.50 = $148.50
4-69
Assign costs to units using
the FIFO method.
4-70
Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending work
in process inventory.
4-71
Step 2: Record the cost per equivalent unit.
4-72
Step 3: Compute the cost of ending work in process inventory.
4-73
Cost of Units Transferred Out
Step 1: Record the cost in beginning work in process inventory.
Units transferred out:
Cost in beginning work in process (WIP) 9,600 $ 5,575 $ 15,175 $
Cost to complete beginning WIP:
Equivalent units to complete 90 140
Cost to complete beginning WIP 6,840 $ 10,150 $ 16,990 $
Cost of units started and completed in May
Units started and completed in May 4,600 4,600
Cost of units started and completed in May 349,600 $ 333,500 $ 683,100 $
Cost of units transferred out 715,265 $
4-74
Step 2: Compute the cost to complete the units in beginning
work in process inventory.
4-75
Step 3: Compute the cost of units started and completed this
period.
4-76
Step 4: Compute the total cost of units transferred out.
4-77
Reconciling Costs
Cost Reconciliation
4-78
Reconciling Costs
Cost Reconciliation
4-79
A Comparison of Costing Methods
In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is superior
to weighted-average because it does not mix
costs of the current period with costs of the
prior period.
4-80

Process Costing Flow and Equivalent Units Calculation

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PowerPoint Lecture Presentation: Prof. OSLER T.

AQUINO, CPA, MBA

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